Argentina's capacity to trigger outrage in sovereign debt circles is to behold. After nine defaults, thousands of lawsuits, and enough intrigue and screaming matches to break Big Data, wouldn't you think that someone somewhere would learn to yawn at another Argentina debt drama. And yet … on the eve of tomorrow's debtapalooza, the internet is hopping mad again about a restructuring proposal from Bueons Aires–not the money (that's regular old mad), but the red-hot-appalling abuse of the shiny new Collective Action Clauses (CACs) in the 2016 bond indenture. The government again managed to tick off both its private creditors, who discovered that their contracts let the debtor gerrymander bond voting pools after the vote, and the well-wishing policy wonks watching their baby–decades of international bond contract reform–swirl down the drain with this one deal's bathwater. Because much of the technical ground was ably covered by my colleagues earlier this evening (don't miss the link to Rodrigo Olivares-Caminal), I have the luxury of using the rest of this post to speculate about the implications of the brouhaha for sovereign debt policy and sovereign debt markets.

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Lest anyone thought they could quarantine or protest in peace, no such luck in the sovereign debt world.

Remember when everyone thought a standstill starting May 1 was a great idea, at least through the rest of 2020? For all the good will, May 1 has come and gone, with few takers and fewer givers.

On the subject of give-and-take — with another default in the rear view mirror, Argentina's government and its creditors are edging closer to a deal this week … unless their talks get bogged down in extreme distrust, undo more than two decades' worth of sovereign debt contract reform, and drag the rest of the world off the cliff with them … which would surprise exactly no one who has ever followed that dysfunctional marriage. 

Speaking of no one — no one seems to have a handle on who owes what to whom on what terms — not with any precision, in any event — which is an awkward place to be when pitched warnings of a mega-debt crisis migrate from research volumes to the New York Times.  And no, it is not all China's fault, it's a structural problem with this ecosystem.

Meanwhile, fears of worldwide sovereign debt distress seem to be driving comparisons to the 1980s, which in turn mean different things to different people — a banking crisis and a Lost Decade to some, market-based (aka publicly subsidized) debt operations to others, and giant shoulder pads to the rest. 

And yet–against predictions and barring classification error–markets have been lending up a storm to vulnerable countries without bothering too much about their contracts.

All this begs two questions–what gives, and what do we do now? — that are the subject of what should be an excellent Sovereign Debt Forum panel on Wednesday morning, led by Rosa Lastra at Queen Mary, co-sponsored with Georgetown IIEL, and including all the usual suspects. Of course I have no answers, but I will try to noodle these and related questions here in the next few days. In particular, I want to unpack what might have gone wrong with the G-20 call for a standstill, ask whether Argentina's debt restructuring threatens international financial architecture, and yell a bit about our collective obsession with Default … among other things that will surely come up in the next 24 hours. 

Further to Mitu's post about the European Central Bank's bond-buying bellyache, let us linger on the rationale for the 33.33% limit on the central bank's holdings of a euro area sovereign bond series. 

In the middle of the Greek sovereign debt crisis, euro area policy makers agreed to adopt functionally identical collective action clauses (CACs) in member state sovereign bonds, with two amendment options for important financial terms: (1) series-by-series voting or (2) aggregated voting, pooling two or more series. In a series-by series vote, two-thirds of the principal amount outstanding can override opposition by a third. In an aggregated vote, amendment requires at least two-thirds of the total principal amount outstanding in the voting pool plus at least half of each series in the pool.* 

The ECB has taken the position that "in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims" to comply with the European treaty framework. This means that, if the ECB held more than one-third of a bond series, it would single-handedly block a single-series restructuring. If the ECB held more than half of a series, it could force it to drop out of an aggregated restructuring as well. To avoid being the holdout, the ECB adopted the 33.33% bond purchase limit in 2015 (see Article 5 of this and this excellent piece by Sebastian Grund). Of course, no matter how little sovereign debt it holds, the ECB makes life easier for other holdouts with its pre-commitment to vote against restructuring — the others need to buy that much less to free ride.

It is unclear whether the 33.33% series limit was motivated by the mere possibility that a government would restructure its debt by written consent* using series-by-series CACs–or a view that this approach was most likely, or even required. Perhaps 33.33% was the the lowest plausible limit, since it is hard to predict how pooling and aggregated voting would work in any given case. Who knows? The only certainty is that in 2015, the ECB voluntarily subjected itself to some oddly-reasoned bond buying caps, and that today, these could knee-cap Italy.

The limit makes even less sense in light of the 2018-2019 commitments by euro area policy makers to adopt so-called "single limb" aggregated stock-wide voting.  Under the latest market standard (due to take effect in the euro area in 2022), a government need not even poll individual series. Now add the likelihood that a country like Italy would restructure using domestic statutes, rather than CACs, as explained in Mitu's post and his article with Ugo Panizza, and 33.33% begins to look mighty random. 

To be sure, it is politically and maybe legally awkward to say that a government would ignore CACs and use domestic law in a restructuring after pushing those clauses as the be-all for years.  It would be more awkward still to say that a government would ignore contracts, statutes, and any other law that might get in its way in an emergency, because aside from peacetime liability management operations, most sovereign debt restructurings could make out a pretty decent case for emergency/necessity rule.

But even if you assume that all euro area sovereign bonds have CACs (they do not) and that they would use them in the unlikely event of a restructuring (they would not), a 33.33% ex ante purchase cap makes little sense. It does not prevent the ECB from helping holdouts, or even from being the main holdout. It does not protect the ECB from losses in the event it is outvoted or suffers a default. It looks like a skimpy formalistic fig leaf covering up for real problems in the underlying treaty framework and short-sighted pre-commitments, at the cost of potentially impeding the ECB's monetary policy efforts at a critical time. The central bank (and the world) would be better off if it were disenfranchised altogether or at least confined to a separate voting pool. Besides, disenfranchisement and confinement are so au courant.

*The thresholds are different for votes taken in a meeting (25%+) and by written consent (33.33%+).

Imagine sovereign debt without Argentina — no Paris Club, no pari passu, no CACs, no SDRM … even sovereign immunity might look totally different. History teaches that whatever happens in Argentina's imminent bond restructuring (revisiting, reprofiling, rejiggering, revamping –the difference is overblown) is likely to have consequences beyond the long-suffering Republic. The fact that Argentina has an actual government with authority over the economy and some capacity to execute a restructuring (unlike, say, Venezuela) justifies wading into the small print of its bond disclosure–as Mark and Mitu have done. Their able interventions free me to focus on two under-covered points. Methinks that (1) the single-minded focus on voting thresholds is misguided, and that (2) it helps to think of "uniformly applicable" as the latest incarnation of pari passu, which goes to show that inter-creditor equity remains a perennial problem in sovereign debt.

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DebtCon3, the Third Interdisciplinary Sovereign Debt Research and Management Conference, is starting in just a few hours at Georgetown Law. This year's DebtCon takes place in parallel with IMF and World Bank Spring Meetings. When we first launched the DebtCon project in the snowstorms of 2016, the idea was to have a giant party — a sovereign debt Coachella — channeling nerdy energy across different academic disciplines and institutional ecosystems, gathering everyone willing to obsess over public debt to help solve a handful of concrete problems. Mitu wanted to serve frozen pizza, but kind souls chipped in for dinner, and we had fish. The Argentina (!#@%*!) panel was snowed out. Nobody got the Sovereign Debt Research and Management joke …but the temporary tattoos worked on key demographics, and we came back. In 2017,   Ugo Panizza and his colleagues at the Graduate Institute put on a fabulous DebtCon2 in Geneva, which set an impossibly (Swissly!) high bar for organization, and here we go again. At last count, the star-studded DebtCon3 program has some 120 speakers, plus over 200 registered guests from around the world — a humongous number for what is often considered a narrow topic. So what is it about sovereign debt? … and what is it about DebtCon?

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This is an important intervention about a massively important topic that comes up over and over again in sovereign restructurings, and will come up in more and more interesting ways in the next few years.

Short version here.